Andreas Feininger Production B-17 heavy bomber at Boeing plant, Seattle Dec 1942
Don’t worry. Won’t be long now.
• US Equity Markets In ‘Dotcom Style’ Bubble (Telegraph)
Asset values around the world are over-heating, the UK’s top professional investors’ body has warned, raising fears over a dotcom-style bubble in US stocks. Investors are concerned that prices for US stocks are dependent on central bank funding, according to a survey of professional money managers completed by the CFA Society of the UK. “US equities are looking particularly expensive since the correction in October as they have powered ahead,” said Simon Evan-Cook, senior investment manager at Premier Asset Management, which manages £3.2bn in funds. “However, valuation always gets in the way of these things, people who said tech was going to change the world back in1999 were right, they just paid too much money for it at the time and we get the impression that could be happening with US equities at the moment,” he added. The survey offers a rare insight into the thinking of the investment community, which manages billions of pounds on behalf of pension funds and households.
It revealed that 42pc of the 554 professional investors now believe that developed market equities are overvalued. The number of money managers that felt there were further gains to be made in equity markets, was just 23pc. The Dow industrials and S&P 500 finished at record levels on Wednesday night before closing for the holiday season on Thursday and Friday. The S&P 500 index gained 0.3pc, to 2,072.83, marking its 47th closing high in 2014. “Government bonds are also horrifically expensive,” said John Ventre, head of Multi-Asset, Old Mutual Global Investors which manages £17.4bn in funds. Mr Ventre added that US equity markets are also looking expensive as earnings growth is relaint on share buybacks and currently unsustainable. “Respondents continue to believe that most asset classes are overvalued. This probably reflects the concern that market values are dependent on the easy monetary conditions being employed by central banks in the face of weak global growth,” said Will Goodhart, CFA Society chief executive.
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Before you know it, we’re talking real money.
• China Has ‘Wasted’ $6.8 Trillion In Investment, Warn Beijing Researchers (FT)
“Ghost cities” lined with empty apartment blocks, abandoned highways and mothballed steel mills sprawl across China’s landscape – the outcome of government stimulus measures and hyperactive construction that have generated $6.8 trillion in wasted investment since 2009, according to a report by government researchers. In 2009 and 2013 alone, “ineffective investment” came to nearly half the total invested in the Chinese economy in those years, according to research by Xu Ce of the National Development and Reform Commission, the state planning agency, and Wang Yuan from the Academy of Macroeconomic Research, a former arm of the NDRC. China is this year on track to grow at its slowest annual pace since 1990, and the report highlights growing concern in the Chinese leadership about the potential economic and social consequences if wasteful investment leaves projects abandoned and bad loans overloading the financial system.
The bulk of wasted investment went directly into industries such as steel and automobile production that received the most support from the government following the 2008 global crisis, according to the report. Mr Xu and Ms Wang said ultra-loose monetary policy, little or no oversight over government investment plans and distorted incentive structures for officials were largely to blame for the waste. “Investment efficiency has fallen dramatically [in recent years],” they say in the report. “It has become far more obvious in the wake of the global financial crisis and has caused a lot of over-investment and waste.” Beijing has in recent years sought to move from its investment-heavy, credit-dependent growth model to one that relies more on consumption and services. But slipping growth rates this year have seen it fall back on loose credit and government-mandated infrastructure investment to prop up the economy and ensure steadily rising employment.
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What a curious headline. OPEC couldn’t have taken any different decision. But that’s because of the global financial situation, not shale.
• Oil Seen in New Era as OPEC Won’t Yield to US Shale (Bloomberg)
OPEC’s decision to cede no ground to rival producers underscored the price war in the crude market and the challenge to U.S. shale drillers. The 12-nation OPEC kept its output target unchanged even after the steepest slump in oil prices since the global recession, prompting speculation it has abandoned its role as a swing producer. Yesterday’s decision in Vienna propelled futures to the lowest since 2010, a level that means some shale projects may lose money. “We are entering a new era for oil prices, where the market itself will manage supply, no longer Saudi Arabia and OPEC,” said Mike Wittner, head of oil research at SocGen in New York. “It’s huge. This is a signal that they’re throwing in the towel. The markets have changed for many years to come.”
The fracking boom has driven U.S. output to the highest in three decades, contributing to a global surplus that Venezuela yesterday estimated at 2 million barrels a day, more than the production of five OPEC members. Demand for the group’s crude will fall every year until 2017 as U.S. supply expands, eroding its share of the global market to the lowest in more than a quarter century, according to the group’s own estimates. Benchmark Brent crude fell the most in more than three years after OPEC’s decision, sliding 6.7% to close at $72.58 a barrel. Futures for January settlement extended losses to $71.12 a barrel in London today, the lowest since July 2010. Prices peaked this year at $115.71 in June.
“We will produce 30 million barrels a day for the next 6 months, and we will watch to see how the market behaves,” OPEC Secretary-General Abdalla El-Badri told reporters in Vienna after the meeting. “We are not sending any signals to anybody, we just try to have a fair price.” OPEC pumped 30.97 million barrels a day in October, according to data compiled by Bloomberg. The group has exceeded its current output ceiling in all but four of the 34 months since it was implemented, the data show. OPEC’s own analysts estimate production was 30.25 million last month, according to a report Nov. 12. Members will abide by the 30 million barrel-a-day target, El-Badri said yesterday. “OPEC has chosen to abdicate its role as a swing producer, leaving it to the market to decide what the oil price should be,” Harry Tchilinguirian at BNP Paribas in London, said yesterday. “It wouldn’t be surprising if Brent starts testing $70.”
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That would do in his own company.
• Russian Oil Oligarch: ‘$60 And Below Is Possible’ (Reuters)
Russia’s most powerful oil official Igor Sechin said in an interview with an Austrian newspaper that oil prices could fall below $60 by mid-way through next year. Sechin, chief executive of Rosneft, Russia’s largest oil producer, also said U.S. oil production would fall after 2025 and that an oil market council should be created to monitor prices, the same day the OPEC cartel met in Vienna and left its output targets unchanged. “We expect that a fall in the price to $60 and below is possible, but only during the first half, or rather by the end of the first half (of next year),” Sechin told the Die Presse newspaper.
On Thursday, OPEC decided against production cuts to halt a slide in global oil prices, sending benchmark Brent crude plunging to a fresh four-year low below $73 a barrel. Russia is not a member of OPEC. Sechin, who met representatives from world oil powers in Vienna earlier in the week, said he believed Russia had the potential to cut between 200,000 and 300,000 barrels a day of production if prices remained low. On U.S. oil production, Sechin said: “After 2025, the production volumes will decrease, namely because of the resource base, to the extent that we know it today.” Earlier on Thursday, Rosneft said in a statement that OPEC’s decision to leave its output unchanged would not affect the work of the company.
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Simialr stories can be told for most of the world’s major oil companies.
• Russian Oil Giant Battles Debt After $55 Billion Deal (Bloomberg)
Igor Sechin spent $55 billion in 2013 to buy competitor TNK-BP and create a Russian oil colossus, pumping about 5% of the world’s crude. Almost two years later and investors have written off the deal. Battered by sanctions and oil’s accelerating price crash, Rosneft has lost 38% of its market value this year in dollar terms and today the whole company, TNK-BP and all, is worth $50 billion. And buying TNK-BP has left Sechin, Rosneft’s chief executive officer and a long-time ally of Russian President Vladimir Putin, with a lot of debt to repay. State-controlled Rosneft owes about $60 billion to banks and bondholders, making it more indebted relative to earnings than any large oil producer apart from Brazil’s Petroleo Brasileiro SA.
“Their aggressive expansion and debt accumulation made them more vulnerable to the falling oil price and the effect of sanctions,” Oleg Popov, who helps oversee $1 billion at Allianz Investments in Moscow, said by phone. Sechin, who had pledged the combined company would be worth $120 billion, has bigger ambitions than simply creating Russia’s largest oil producer. Putin’s point man for energy has sought to build a global oil major, swapping drilling rights at home for exploration blocks from Norway to the Gulf of Mexico. He bought production projects in Venezuela and half an oil refinery in Germany. As the company’s balance sheet gets more stretched, he will find it harder to achieve those aims, providing an example of how the Ukraine crisis has harmed some of Russia’s largest companies and limited their ambitions to expand globally.
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“OPEC secretary general Abdulla Salem El-Badri denied the meeting was divided and that the decision will trigger a price war that could put shale oil drillers in the US out of business. “We’re not sending any signal,” he said.”
• US Shale Boom Is Same As Dotcom Bubble, Says Russian Oil Executive (Telegraph)
The rise of US shale is similar to the dotcom boom of the late Nineties and will cause many companies to fail, one of Russia’s top oil executives has warned. Leonid Fedun, vice-president of Lukoil, Russia’s second-largest oil producer, believes that with the price of Brent crude and WTI at multi-year lows, fracking companies will struggle to make fracking profitable. These fears were given extra weight on Thursday after Opec’s members agreed to leave oil production quotas unchanged, sending oil prices plummeting. Some believe Opec, which controls the majority of the world’s oil output, is threatened by the emergence of US shale and is trying to force many American drilling companies out of business. “In 2016, when Opec completes this objective of cleaning up the American marginal market, the oil price will start growing again,” Mr Fedun told Bloomberg. He said the current oil market was similar to the rise of the technology sector more than a decade ago that saw companies’ stock prices surge before collapsing several years later.
“The shale boom is on a par with the dotcom boom. The strong players will remain, the weak ones will vanish,” added Mr Fedun, who is worth around $4bn. The price of a barrel of Brent crude oil dropped 6.7pc to $72.58 on Thursday, while WTI fell 6.3pc to $69.05. The sharp falls came after Opec’s members agreed to keep oil production levels at 30m barrels per day (bpd), following three days of talks in Vienna. The meeting ended in anger, with Venezuela’s representative, Rafael Ramirez, storming out of the secretariat after his proposal to make cuts of up to 1.5m bpd was rejected. OPEC secretary general Abdulla Salem El-Badri denied the meeting was divided and that the decision will trigger a price war that could put shale oil drillers in the US out of business. “We’re not sending any signal,” he said.
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“The major strike is against the American market ..”
• OPEC Policy Ensures US Shale Crash, Russian Tycoon Says (Bloomberg)
OPEC policy on crude production will ensure a crash in the U.S. shale industry, a Russian oil tycoon said. The Organization of Petroleum Exporting Countries kept output targets unchanged at a meeting in Vienna today even after this year’s slump in the oil price caused by surging supply from U.S shale fields. American producers risk becoming victims of their own success. At today’s prices of just over $70 a barrel, drilling is close to becoming unprofitable for some explorers, Leonid Fedun, vice president and board member at Lukoil, said in an interview in London. “In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,” said Fedun, who’s made a fortune of more than $4 billion in the oil business, according to data compiled by Bloomberg. “The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”
At the moment, some U.S. producers are surviving because they managed to hedge the prices they get for their oil at about $90 a barrel, Fedun said. When those arrangements expire, life will become much more difficult, he said. While some OPEC countries including Venezuela pushed for a reduction in output quotas at today’s meeting, Saudi Arabia, the group’s dominant member, argued for the status quo. In Russia, where Lukoil is the second-largest producer behind state-run Rosneft, the industry is much less exposed to oil’s slump, Fedun said. Companies are protected by lower costs and the slide in the ruble that lessens the impact of falling prices in local currency terms, he said. Even so, output in Russia, the biggest producer after Saudi Arabia in 2013, is likely to fall slightly next year as lower prices force producers to rein in investment, Fedun said. “The major strike is against the American market,” Fedun said.
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Yes. Quite a few.
• Will OPEC Bankrupt US Shale Producers? (CNBC)
OPEC’s contentious decision to keep its production target, leaving the market with a supply glut, could trigger a wave of debt defaults by U.S. shale oil producers, warn analysts. The 12-member oil cartel on Thursday said it would stick to its output target of 30 million barrels a day, triggering a sharp decline in oil prices, with U.S. crude futures tumbling nearly $6 to $67.75 on Friday – the lowest since May 2010. Neil Beveridge, senior oil analyst at Sanford C. Bernstein, told CNBC the plunge in oil prices raises the risk of bankruptcy for U.S. shale players. “While production growth is very strong [in North America], remember if you look at the debt situation for a lot of these companies, there is a lot of distressed debt,” said Beveridge. “$68 a barrel is not economical for a lot of these shale oil wells. CDS [credit default swap] spreads and yields on some of the debt are rising very quickly, because at these kinds of oil prices you are going to see producers go bankrupt,” he added.
Since 2011, U.S. energy firms have ploughed some $1.5 trillion into ramping up their operations, taking on a large share of debt to do so, according to Alliance Bernstein. Debt issued by energy companies now accounts for more than 15% of U.S. junk bond market, compared with less than 5% a decade ago. Small companies that have levered up to fund exploration and production will see their margins squeezed with bankruptcy “a distinct possibility,” Ivan Rudolph-Shabinsky, portfolio manager of credit at AllianceBernstein, wrote in a blog post this week. “Companies involved in exploration and production—known as ‘upstream operations’—are vulnerable simply because they’ve earmarked too much capital for production. While fracking has helped increase capacity, the cost of developing production capabilities isn’t likely to be fully recovered,” Rudolph-Shabinsky said.
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Carnage in the tar.
• Tar Sands Producers With World’s Cheapest Oil Face Cascading Woes (Bloomberg)
Canada’s biggest energy producers now face the same prospects of shrinking budgets and declining profit as their smaller rivals as prices drop for what’s already the world’s cheapest oil. Producers including Suncor and Canadian Natural, which each fell the most in at least three years yesterday, operate in one of the most expensive places on earth to produce oil. If crude prices continue sinking following OPEC’s decision not to cut global oil supplies, Canada’s producers big and small will have to tighten their belts to prepare for declining profits. “This is a pretty big shock,” said Justin Bouchard, an analyst at Desjardins Securities in Calgary. “There’s no question there’s going to be a slowdown. Even the big guys will have to look at their capital spending plans.”
Western Canada Select, the Canadian benchmark, has lost more than a third of its value since June, in step with declines for West Texas Intermediate and the international gauge Brent. WCS traded yesterday at $55.94 a barrel, the lowest in the world. Investors reacted by sending the 69-company S&P/TSX Composite Index Energy Sector Index down 5.1%, the most since August 2011. WTI sank as much as 8.1% and Brent fell as much as 8.4% after the announcement from OPEC. Large Canadian energy producers will probably trim capital spending with WTI below $70 a barrel, which reduces cash flow about 30%, Matthew Kolodzie, a Toronto-based credit analyst at RBC Dominion Securities, said in a note yesterday. If oil falls to $60 a barrel and natural gas prices decline as well, Canadian Natural will probably have to lower spending plans by C$2 billion ($1.8 billion), Kolodzie said.
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You can’t force people to spend, not as a government, not as a central bank. There’s no such thing as omnipotence, and this is where that shows.
• Abe Tested by Weak Retail Sales as Japan Election Looms (Bloomberg)
Japan’s inflation slowed for a third month and retail sales fell more than forecast, showing the economy continues to struggle from a sales-tax increase as Prime Minister Shinzo Abe heads into an election next month. The Bank of Japan’s key price gauge increased 2.9% in October from a year earlier, equivalent to a 0.9% gain when the effects of April’s tax bump are excluded. Retail sales dropped 1.4% from September, more than a 0.5% decline forecast in a Bloomberg News survey. An unexpected increase in production points to resilience among manufacturing exporters that contrasts with the pinch on Japanese households from the weakening yen amid unprecedented monetary easing.
Abe has ordered preparations for a stimulus package as he seeks a fresh mandate for Abenomics in an election Dec. 14. “There is still no clear sign that domestic consumption is recovering after the sales-tax hike,” said Minoru Nogimori, an economist at Nomura Holdings Inc. “Fiscal stimulus would be a plus but probably won’t be large enough to provide sufficient support, given Japan’s fiscal situation.” With today’s data reinforcing forecasts for the BOJ to expand its already unprecedented monetary stimulus, two-year note yields slumped below zero% for the first time and the yen dropped – sending Japanese equities higher.
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True for many nations.
• Good or Bad? Oil Slide Poses Conundrum as Japan Seeks Inflation (Bloomberg)
When a country imports almost all its energy, a slide in oil prices to a four-year low should be helpful – cutting costs for companies and households. For Japan, it may not be so simple. The reliance of the world’s third-largest economy on fossil-fuel imports has deepened since Japan shuttered its nuclear-power industry following the March 2011 Fukushima meltdowns. With the price of Dubai crude oil – a benchmark for Middle East supply to Asia – down more than a third from a June peak, that ought to mean more disposable cash for households who have been hit by an April sales-tax increase. Economy Minister Akira Amari reinforced this good-news interpretation today, telling reporters in Tokyo that cheap oil helps to offset the impact of a tumbling yen – which drives up the cost of imported goods.
Where sliding energy costs are a challenge is the campaign by policy makers to embed inflationary expectations across the economy. After 15 years of entrenched deflation, central bank Governor Haruhiko Kuroda is trying to get sustained 2% gains in consumer prices. Until wage rises are so big that they make companies push up prices, much of the onus is on import costs, so a slump in oil undercuts Kuroda’s efforts. “The declining oil prices are positive to consumers and companies, but they give Kuroda a headache as he commits on prices rather than economic growth,” Hiroaki Muto, an economist at Sumitomo Mitsui Asset Management in Tokyo. “The answer could be further monetary easing.”
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Japan can’t afford to lose its domestic investor base due to Kuroda’s bond buying, it’s the only thing that kept the mad government debt situation controllable.
• Kuroda Bond Splurge Crowds Out Individual Buyers (Bloomberg)
The Bank of Japan’s record bond buying is crowding out individual buyers, narrowing the investor base for the world’s second-largest bond market. The government last month canceled sales of sovereign notes maturing in 2016 through financial companies to households because buyers would have to pay more in broker fees than they would get in interest, according to the Ministry of Finance. The BOJ’s 80 trillion yen ($677 billion) a year in debt purchases drove two-year yields below zero today for the first time on record in secondary market trading. The coupon on the latest two-year securities was 0.038%, less than half the rate in June last year, and compared with about 0.02% interest on bank deposits. “The BOJ’s massive JGB buying is hampering efforts to increase sales to individual investors,” said Toru Suehiro, a market economist in Tokyo at Mizuho Securities, one of the 23 primary dealers obliged to bid at government bond auctions.
“Diversifying the investor base is important for the stabilization of the market over the longer term but the excessive decline in yields poses a dilemma in that sense.” BOJ Governor Haruhiko Kuroda has been driving down sovereign yields to encourage investment in riskier corporate notes and stocks. The Ministry of Finance, by contrast, needs to spur demand from a broad range of buyers as 109.72 trillion yen of debt come due this fiscal year, bigger than Indonesia’s economic output. Historical volatility on JGBs surged to the highest since August 2013 this week, adding to concerns over the impact of any exit from monetary easing. The government started sales of JGBs to households in 2003 and began offering some notes at financial companies after the privatization of Japan Post in 2007. In an attempt to get a greater number of individuals to finance the world’s largest debt burden, the ministry in January also switched to monthly sales of 10-year, floating rate bonds and fixed rate, 5-year notes, from every three months previously.
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With one lower oil prices, deflation can no longer be denied. Or conquered with stimulus.
• Eurozone November Inflation Dips To 0.3% (CNBC)
Eurozone inflation fell again in November amid expectations that the European Central Bank could try to bolster the region’s economy by announcing further stimulus measures. Consumer prices rose 0.3% in November from the same period a year earlier, according to a flash estimate from Eurostat, the EU statistics office. This is down from 0.4% in October and in line with market expectations. The single currency fluctuated in morning trade on Friday amid a slew of economic news. After the inflation number the euro rose to around 1.2446 against the greenback after trading at 1.2435 beforehand. The inflation data come at a key time for the ECB, just days ahead of its next policy meeting on Thursday. The bloc has been staring down the barrel of negative growth and weak demand, with tensions in Ukraine pressuring Germany in particular. Market-watchers have been busy this week placing bets on whether Mario Draghi, president of the ECB, will announce more stimulus, even as soon as next week.
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Opinions in Germany no longer rhyme. At some point Merkel will have to lower her tone.
• Germany Warns Wrecking Russian Economy Would Be Perilous (Bloomberg)
Germany wants to avoid wrecking Russia’s economy with sanctions imposed in the conflict over Ukraine, Foreign Minister Frank-Walter Steinmeier said. The economic measures are taking a toll on Russia, so the European Union doesn’t need to intensify them, Steinmeier said in a speech today in Berlin. Instead, Germany must take the lead in negotiations aimed at defusing the eight-month conflict on Europe’s eastern periphery, he said. “An economically isolated Russia, one that may face collapse, would not help improve security in Europe or in Ukraine, but would pose a danger to itself and others,” Steinmeier said. “One of the problems is that many people aren’t having a dialogue. That’s not true of the Germans.” Steinmeier echoed Chancellor Angela Merkel’s warning that the standoff with Russia over the conflict in Ukraine will be lasting.
Even as fighting flares between pro-Russian separatists and Ukrainian forces in the former Soviet republic’s east, with Europe accusing Russia of stoking the conflict, Steinmeier said the door to talks should remain open. The clash over Ukraine “won’t be over tomorrow or the day after tomorrow,” Steinmeier said. “I plead as a necessary reaction not to hold senseless talks, but at the same time, not to foreclose simply on all the channels” with Russia. Germany can’t declare Russia, its “rather large neighbor,” a friend or enemy, Steinmeier said. Officials in the 28-member EU who argue for ratcheting up sanctions because they’re working suffer from a “dangerous misunderstanding.” “Can that really be our aim and purpose, to wrestle Russia economically to the ground with those instruments that we have and can sharpen?” Steinmeier said. “My single answer is: No, that’s not true and can’t be the purpose of sanctions.”
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Taking America apart, one step at a time.
• Junk Bond Carnage, One Company at a Time (WolfStreet)
Storied weapons maker Colt Defense LLC is in a pickle. But it’s not the only junk-rated company in a pickle. The money is drying up. Selling even more new debt to service and pay off old debt is suddenly harder and more expensive to pull off, and holders of the old debt – your conservative-sounding bond fund, for example – are starting to grapple with the sordid meaning of “junk”: Colt announced on Wednesday that it might not be able to make its bond payment in May. [..] This scenario is starting to play out company by company, hitting the most fragile ones first, as investors are becoming at least somewhat reluctant to throw good money after bad. That reluctance has to be overcome with additional compensation in form of yield, thus a greater expense for the companies when they can least afford it.
The junk-debt-funded oil and gas shale revolution is particularly on the hot seat. Its ever-faster moving fracking treadmill of steep decline rates and costly drilling is now smacking into the plunging price of oil. Hoping that the price of oil and gas would only go up, energy companies have drilled $1.5 trillion into the ground since 2000, and they’re now shouldering a huge pile of debt – much of it junk rated. This year, energy companies have issued 15.2% of all new junk bonds. Yet, oil and gas production is only a small part of the US economy. In 2013, their junk bond issuance made up 10.3% of all junk bonds. Back in 2004, it made up 4.3%. That’s how the fracking party has been funded.
The more the price of crude drops, the deeper these companies sink into the morass. At some point, defaults will begin to cascade through the system. The total return on the Merrill Lynch High Yield Energy Index for the last three month was a loss of 5.8%, the worst performance since the fourth quarter of crisis year 2008. More broadly, the average yield of CCC or lower rated bonds, the riskiest junk out there, shot up from 8% in early July to over 10% on Tuesday, according to the BofA Merrill Lynch US High Yield Index. And the High Yield Total Return Index for these types of bonds lost 5.3% over the same period. Meanwhile the BofA Merrill Lynch US High Yield BB Index, which groups together less risky junk bonds, has barely budged with yield at a historically low 4.8%. It’s still fully suspended in the middle of a magnificent bubble.
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Citigroup’s Willem Buiter is the butt of goldbugs anger today.
• Swiss Vote Provokes ‘6,000-Year Gold Bubble’ Attack (AEP)
5 million Swiss voters will decide on Sunday whether to force the Swiss National Bank to repatriate all its gold from vaults in Britain and Canada, boost its holdings of bullion to 20pc of foreign reserves and then keep the metal forever. The “Save Our Swiss Gold” referendum is a valiant attempt by Switzerland’s army of gold bugs – and the populist Swiss People’s party (SVP) – to lead the world back to the halcyon days of the international Gold Standard. It is a primordial scream against a quantitative easing and money creation a l’outrance by the leading central banks. Yet there is a snag. The Swiss National Bank (SNB) is the biggest printer of them all in relative terms, far outstripping the Bank of Japan, let alone the US Federal Reserve or the Bank of England – mere amateurs at this game. The SNB has boosted its balance sheet to a colossal 83pc of GDP in a maniacal – but fully justified – effort to stop the Swiss franc appreciating beyond 1.20 to the euro, and to head off deflation.
It vowed to print whatever is necessary to buy foreign bonds and defend the exchange rate. It has been true to its word since 2011. At one stage it was mopping up half of the entire sovereign bond issuance of the eurozone each month, a scale of action that the European Central Bank’s Mario Draghi can only dream of. During the eurozone debt crisis, Standard & Poor’s even accused the SNB of becoming a conduit for capital flight, via Switzerland, to German, Dutch and French bonds, and therefore indirectly exacerbating Euroland’s North-South rift. You have to smile when you hear Swiss gold enthusiasts complaining that these foreign bonds – bought with electronic fiat francs created out of thin air – are now losing value as the euro slides against the dollar. But then we all suffer from congnitive dissonance. The result of this buying blitz is that the SNB now has a balance sheet of 522bn francs (£345bn). Only 7.5pc of this is in gold, some 1,040 metric tonnes. It will have to buy 1,733 tonnes to reach the 20pc target mandate by 2019 if the vote passes.
Gold bulls are snorting. The world’s annual mine output is roughly 2,500 tonnes. We can all do the arithmetic. The SNB might persuade a friendly central bank to sell a few crates, but last year the central banks were net buyers. Led by Russia and other BRICS states, they bought 367 tonnes. Citigroup’s Willem Buiter has poked fun at the Swiss plan, and at metal fetishism in general, in a lascerating report entitled Gold: a six thousand year-old bubble revisited. “Making it illegal to ever sell any of the gold the central bank has now or acquires in the future would make the gold useless as an international reserve. The gold stock can never be used for foreign exchange market interventions and it cannot be used as collateral. The gold becomes useless as a store of value of any kind. Its value is therefore zero.” Mr Buiter says gold is a “fiat commodity” of almost no intrinsic value, coveted only as an asset “to the extent that enough people believe it has value as an asset”.
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• Italian Unemployment Rises to Record (Bloomberg)
Italy’s unemployment rate unexpectedly rose above 13% in October, setting a new record as businesses refrain from hiring amid the country’s longest recession since World War II. The unemployment rate rose to 13.2% from a revised 12.9% the previous month, the Rome-based national statistics office Istat said in a preliminary report today. That’s the highest since the quarterly series began in 1977. The median estimate of seven economists surveyed by Bloomberg called for an unemployment rate of 12.6% in October. Youth unemployment rate for those aged 15 to 24 rose to 43.3% last month from 42.7% in September, today’s report showed.
Italian Prime Minister Matteo Renzi has been battling labor unions and politicians from the opposition and within his own party to push through reforms to make the labor market more flexbile and eliminate the gap between overprotected workers with open-ended contracts and younger people with no job security. The proposed reforms are still being discussed by parliament. After the final approval, the government will have another six months to detail the measures and pass them via decrees, meaning the changes won’t be in place until next year at the earliest.
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“The biggest danger we see right now is a period of window dressing where lip service is paid to grand projects and reforms ..”
• France Paying For Past Mistakes: Economy Minister (CNBC)
French Economy Minister Emmanuel Macron has placed the blame for the sustained weakness in his country’s economy with previous administrations, saying the country was paying for past mistakes. “I do think that this feeling (of frustration) is clearly due to our past and we are paying for past mistakes. But first, during the last two years we have started to reform and now we have decided to accelerate these reforms and I do think that we have to deliver more, more rapidly and explain more – that’s the key point,” he told CNBC on Thursday. “That’s what we want to do and that’s what we are doing but it’s unfair that the current frustration is due to the current situation, it’s due to the past,” he said. France’s socialist government has come under fire for failing to reignite the country’s weak economic activity. More people are now unemployed in the country than ever before and the government has clashed with trade unions in its efforts to reform the labor market.
Macron said the country shouldn’t have to “pay twice”, adding: “we cannot pay for the past.” His comments come after a high-profile report in which proposals were put forward to rescue Germany and France’s economies, the largest and second-largest economies in the euro zone respectively. The economists who authored the report – Henrik Enderlein and Jean Pisani-Ferry, both professors at Germany’s Hertie School of Governance – proposed a package of reforms and initiatives designed to revive growth. They also warned in their report that both countries had no time to lose in implementing reforms. “France and Germany need to act now. And they need to act together. The biggest danger we see right now is a period of window dressing where lip service is paid to grand projects and reforms, but no real steps are taken”, ” the authors said in the 50-page report, noting both countries face elections in 2017.”
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I smell default.
• Venezuela Burns Through Third of New Chinese Money in a Week (Bloomberg)
Venezuela’s international reserves declined $1.3 billion in the week after President Nicolas Maduro transfered $4 billion of Chinese loans to the central bank. The country’s reserves dropped to $22.2 billion today, according to central bank data. A collapse in global oil prices pushed Venezuela’s foreign currency holdings to an 11-year low earlier this month. Maduro on Nov. 18 ordered the Chinese loan proceeds to be moved from an off-budget fund, so that they would show up in reserves and help boost investor confidence in an economy beset by the world’s highest inflation and widest budget deficit. The following day, Venezuelan bonds rose the most in six years in intraday trading. “If the plan was to calm the bondholders, then burning through a third of that money in five working days doesn’t do it in any way,” Henkel Garcia, director of Caracas-based consultancy Econometrica, said in a telephone interview.
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It’s about to get worse, not better. The weakest go first.
• Reports of Thailand’s Revival Are Greatly Exaggerated (Bloomberg)
Thailand may still be the best place in the world to get a nose job, even after its military coup last spring. But tentative signs of an economic rebound hardly resolve the deep structural problems that continue to afflict its politics, economy and society.
The Thai stock market is booming, and growth has ticked upward slightly after shrinking almost 2% in the first quarter. The country has retained its position as the world’s No. 1 destination for medical tourism, including cosmetic surgeries. At best, however, May’s coup has only stemmed the bleeding caused by months of political turmoil. The World Bank thinks the country will remain the slowest-growing economy in Southeast Asia through 2016. High household debt levels – more than 80% of gross domestic product – will continue to depress spending. While coup leaders have put some money in citizens’ pockets with millions in payments to rice and rubber farmers, household consumption is projected to grow only 1.5% next year.
The central bank’s easy-money policy has led mostly to a run-up in stock prices. Previous military-led governments in the 1980s were able to jump-start growth through heavy state-directed investment. But today’s ruling generals face a more complex challenge. It’s too late for Thailand to regain low-end manufacturing jobs, which have shifted to cheaper neighbors. To move up the value chain, the country needs to invest in education, research and development, and infrastructure – something juntas have proved no better than civilian governments at doing. Plans to spend $60 billion on transportation infrastructure during the next 10 years will help but not immediately and not enough.
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“The impact of homelessness on the children, especially young children, is devastating and may lead to changes in brain architecture that can interfere with learning, emotional selfregulation, cognitive skills, and social relationships.”
• America’s Youngest Outcasts (Homeless Children America.org (pdf))
America’s Youngest Outcasts reports on child homelessness in the United States based on the most recent federal data that comprehensively counts homeless children, using more than 30 variables from over a dozen established data sets. A staggering 2.5 million children are now homeless each year in America. This historic high represents one in every 30 children in the United States. Child homelessness increased in 31 states and the District of Columbia from 2012 to 2013. Children are homeless in every city, county, and state—every part of our country. Based on a calculation using the most recent U.S. Department of Education’s count of homeless children in U.S. public schools and on 2013 U.S. Census data:
• 2,483,539 children experienced homelessness in the U.S. in 2013.
• This represents one in every 30 children in the U.S.
From 2012 to 2013, the number of children experiencing homelessness annually in the U.S.:
• Increased by 8% nationally.
• Increased in 31 states and the District of Columbia.
• Increased by 10% or more in 13 states and the District of Columbia.
Major causes of homelessness for children in the U.S. include: (1) the nation’s high poverty rate; (2) lack of affordable housing across the nation; (3) continuing impacts of the Great Recession; (4) racial disparities; (5) the challenges of single parenting; and (6) the ways in which traumatic experiences, especially domestic violence, precede and prolong homelessness for families. The impact of homelessness on the children, especially young children, is devastating and may lead to changes in brain architecture that can interfere with learning, emotional selfregulation, cognitive skills, and social relationships. The unrelenting stress experienced by the parents, most of whom are women parenting alone, may contribute to residential instability, unemployment, ineffective parenting, and poor health.
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